CFA Level II ExamPortfolio Management and Wealth PlanningHard
A portfolio manager believes that the market is currently overreacting to negative short-term news, causing certain high-quality growth stocks to be undervalued. She decides to temporarily overweight these stocks in the portfolio, deviating from the long-term target asset allocation. This decision is based on her expectation that the market will correct itself and these stocks will rebound in the near future. Which asset allocation approach is she primarily employing?
- ATactical Asset Allocation (TAA)
- BConstant Proportion Portfolio Insurance (CPPI)
- CStrategic Asset Allocation (SAA)
- DDynamic Asset Allocation (DAA)
Show answer & explanationAnswer & explanation
Correct answer: A. Tactical Asset Allocation (TAA)
Tactical Asset Allocation (TAA) involves making short-term adjustments to asset class weights, deviating from the strategic (long-term) allocation, to exploit perceived temporary market inefficiencies or mispricings. The manager's belief in a short-term market correction and temporary overweighting of undervalued stocks perfectly aligns with TAA.
Why the other options are wrong
- B. CPPI is a portfolio insurance strategy that adjusts exposure to risky assets based on a cushion, not a discretionary market timing approach for overvalued/undervalued stocks.
- C. SAA sets long-term target weights and is not about short-term deviations for market timing.
- D. DAA involves continuous, systematic adjustments based on changing market conditions and risk tolerance, often using quantitative models, rather than discretionary short-term market timing.
Tactical Asset Allocation (TAA)
An active asset allocation strategy that involves making short-term, opportunistic adjustments to the strategic asset allocation to capitalize on perceived temporary inefficiencies or mispricings in the market.
- Deviates from long-term strategic weights.
- Aims to add value through market timing or sector rotation.
- Requires active management and a belief in market predictability.
Memory trick: Allocation: S.T.A.N.D. for how you cut the pie.